Further on central bank independence

My friend shared with me an article by Shri. A.V. Rajwade on central bank independence. It is about a week old.

Some thoughts triggered by that article:

In recent times – post-1970 experience of stagflation – goverments decided – inspired by academics – to cede more powers to a technocratic central bank for three reasons:

(1) It would be seen as a credible and large-hearted, long-term, visionary response to the problem of inflation: “We created inflation and we are now tying our own hands by transferring the power to another institution which does not carry our structural deficiencies.

(2) It was also convenient. Blame can be passed on to someone else. That situation did not arise because inflation was held back by a variety of factors.

(3) The economic paradigm changed in the Seventies. Fiscal policy and Keynesianism gave way to rules. Discretion was de-emphasised. Unfortunately, only the discretion of the elected representatives was de-emphasised but the discretion of unelected and largely unaccountable technocrats increased with the framework of central bank independence.

I think it was also a very clever move to insulate from public scrutiny the influence of the interest of financial markets on public policy. An aloof, opaque, technocratic institution blessed with the perception of non-corruptibility is an ideal smokescreen for creating policies that favoured financial markets and financial interests. Democratic politicians would be subjected to harsher scrutiny. Ph.Ds with beards (or not) from elite universities would not be subjected to a similar treatment. They automatically got the benefit of doubt in the incestuous world of intellectuals-policymakers and the commentariat.

Journalists and commentators wanted to be seen as less in thrall to politicians but more to intellectuals. The latter is more respectable and acceptable. Hence, central bankers escaped tough scrutiny. That suited everyone, including the politicians!

These three factors explain how the idea of central bank independence took root in western economies in the 1970s.

To the extent that inflation is now welcomed and finance is being throttled back (let us see what President Trump does), automatically the case for an independent central bank is weakened.

Further, central banks have also invited the possibililty of losing their independence into their hallowed portals by conflating monetary policy with fiscal policy, with open contemplation of helicopter money – monetisation of fiscal stimuluses and with negative interest rates.

They overstepped and they have to be reined in. This is an outcome in accordance with the laws of nature.

But, economic frameworks, concepts, policies and prescriptions have a context. The context for developing economies is very diferent from the above discussion.